What is an Innocent Spouse and an Injured Spouse?
Many married couples opt to file their tax returns jointly because it is often the most beneficial status to use. But it’s not without risks. If your spouse has been neglectful when it comes to complying with tax laws and other aspects of personal finance, you might want to opt for separate returns opposed to one joint return. Divorced couples and married couples facing financial strain frequently face being treated as an injured or innocent spouse for tax purposes if one spouse gets disproportionately affected by a misstatement on a joint tax return.
The Difference Between Innocent and Injured Spouse
While an innocent spouse and an injured spouse are technically the same thing, “innocent spouse” refers to a specific type of tax relief sought by married people who had no knowledge of their spouse’s wrongdoing as far as errors, omissions, and other aspects of tax reporting are concerned. An injured spouse is someone who is stuck paying for additional taxes arising from misstatements made on a joint tax return.
An innocent spouse is totally unaware that their spouse deliberately misreported income and/or deductions wile an injured spouse wants to avoid those additional taxes and penalties upon the IRS discovering the unreported income.
There are different forms that need to be filed for innocent spouse relief and requests for an injured spouse to not be held responsible for tax debts arising from deliberate misreporting from a spouse and/or to have their share of a joint tax refund seized. Couples who are going through divorce and/or are less transparent about finances with one another are more likely to encounter innocent and injured spouse situations.
Is It Worth It to Just File Separate Returns?
The concept of filing separately tax returns dates back to a California court case in 1925 when a couple wanted to be able to file separate returns but joint status was the only option. Almost a century later, people still make the decision to file jointly or separately based on the tax benefits at the couple’s disposal. The degree to which you wish to keep your finances separate from your spouse’s also factors into whether you’d file jointly or separately.
Since financial troubles are often a reason couples divorce, keeping taxes and other facets of personal finance well-organized and free from willful misreporting is definitely key to both a happy marriage and happy finances. Many couples choose to keep their finances totally separate, even including tax returns, for this reason. As for whether it is worth it to avoid this risk and just file separate tax returns no matter what, it ultimately depends on both your and your spouse’s situations and how well you trust each other with money matters. If you’ve always filed your taxes on time and kept excellent records by yourself or with an accountant then you marry a person whose finances are a mess? They might still be a good partner as far as your personal needs are concerned but not someone you want to sign a joint tax return with if you’d put your refund at risk every year because they kept forgetting to pay their estimated taxes and kept poor records of their income and deductions.
Married filing separately is the least beneficial status for filing taxes in that it reduces the threshold for many benefits, and for lower-income couples it completely eliminates some of them like the Earned Income Tax Credit. But if your financial situation is complex enough that it warrants taking the risk of needing to file or injured or innocent spouse protection, filing separate just may be worth the loss of potential benefits. Separate returns are just as valid as joint returns and you are not held liable for what your spouse reports on their separate return and vice versa.
Whether you need guidance in managing your money as a couple, would like to optimize joint versus separate returns, or are having difficulties navigating the tax and financial aspects of divorce, Rue & Associates is available year-round to get your issues resolved. Contact us today to speak to one of our friendly and professional tax law experts.